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Archives for August 2013

In Chamanara v. Djahanguiri, 2013 IL App (1st) 122885-U, the First District discussed the contours of the fraud in the execution defense in a specific performance suit to enforce a stock purchase agreement.

Facts: The case involves two adjacent Chicago commercial properties located at 1206 N. State (“1206 Space”) and 1212 N. State St. (“1212 Space”). Plaintiff rented the 1206 Space from defendant for several years and operated various restaurants on it.

The plaintiff sued to enforce a convoluted agreement involving the two spaces. The agreement called for the parties to become 50/50 shareholders in defendant’s property management firm and share rent proceeds for both the 1206 and 1212 Spaces. The relationship crumbled and the plaintiff sued to enforce the agreement. Defendant raised the fraud in the execution defense; saying he never agreed to partner with the plaintiff on the 1212 Space. After a bench trial, the Circuit Court found for defendant and plaintiff appealed.

Held: Affirmed. Defendant proved by clear and convincing evidence that he was tricked into signing the agreement.

Rules/reasoning:

Central to the Court’s fraud in the execution finding was the evidence that plaintiff “surreptitiously substituted” the 1212 Space agreement for the 1206 Space agreement (which defendant intended to sign). This resulted in the defendant unwittingly signing away a 50% interest in both the 1206 and 1212 Space’s future rental stream.

The Court espoused the following key fraud in the execution principles:

(i) fraud in the execution is an exception to the general rule that one who has ample opportunity to read a document can’t later claim he was deceived as to a document’s meaning or content;

(ii) the party claiming fraud in the execution must prove the defense by clear and convincing evidence (a higher burden than the more-likely-than-not preponderance standard);

(iii) fraud in the execution applies where the instrument is misread to the party signing it,

(iv) where there is surreptitious substitution of one paper for another or where (as here) a party is tricked into signing a document he didn’t mean to sign.

(¶¶ 74-75).

The First District agreed with the trial court that this was classic fraud in the execution. The defendant’s unchallenged fraud in the execution evidence at trial included (a) testimony from multiple witnesses that the parties’ never came to agreement on the 50/50 partnership; and (b) the suspicious circumstances surrounding defendant’s execution of the 1212 Space agreement – namely, that plaintiff immediately snatched the papers away from defendant after he signed them, precluding defendant from a meaningful opportunity to see what he was signing. (¶¶ 76-81).

And since the plaintiff failed to counter defendant’s evidence at trial, the First District agreed with the trial court and found that defendant met his burden of proving that plaintiff tricked him into signing the stock purchase agreement for the 1212 Space.

Take-aways: Fraud in the execution requires an elevated proof burden burden. In Chamanara, the defendant offered both testimonial (from multiple sources) and documentary evidence to support his claim that plaintiff hoodwinked him into signing away a 50% interest in his leasing company. The plaintiff’s inability to counter this evidence made it impossible for him to defeat defendant’s fraud defense. The case also illustrates a court’s willingness to look into the minute details (i.e., the court discussed at length how plaintiff only showed the documents upside down on his coffee table to defendant at the moment of signing) of circumstances surrounding a document’s execution in order to fully inform its fraud analysis.

– A Section 2-619.1 motion must be in parts, must specify which section the motion is made under and clearly show the points or grounds relied upon under each section;

– Section 2-619.1 does not permit a movant to submit evidentiary material that contests the truth of the plaintiff’s allegations – both section 2-615 and 2-619 motions concede the truth of well-pled facts

(¶¶ 20-22)

Section 2-615(a) Motions (Complaint fails to state a cause of action)

– Section 2-615(a) motions are based on defects apparent on the face of a complaint;

– The movant is saying “so what? the facts plaintiff alleges don’t state a cause of action against me”;

– The court only considers (1) facts on the face of the pleadings; (2) matters subject to judicial notice; and (3) judicial admissions in the record;

– A movant’s use of deposition testimony to support a section 2-615 motion is improper;

– Section 2-615(a) is the proper vehicle for a motion to strike and should be used only where the allegation attacked is irrelevant and prejudicial to the movant.

(¶¶ 25, 26, 41)

Section 2-619(a)(9) Motions – Content and ‘Affirmative Matter’

– Purpose: to provide litigants with a way to dispose of issues of law and easily proved issues of fact – relating to affirmative matter – early in the litigation;

– The 2-619(a) motioning party is basically saying “yes, the complaint is legally sufficient but an affirmative matter exists that defeats the claim”;

– “affirmative matter” = a defense that is not a negation of the essential allegations of the plaintiff’s claim but that defeats the cause of action completely (examples: tort immunity, lack of standing);

– affirmative matter must be apparent on the face of the complaint. If it’s not, the defendant should support his motion with affidavits or other evidence;

– “affirmative matter” does not include evidence the defendant expects to contest an ultimate fact stated in the complaint. Example: if the plaintiff’s complaint says “the light was green” and defendant files a motion with a supporting affidavit or deposition that says “the light was red!”, this is not a proper 2-619 basis. It is however a proper summary judgment (2-1005) basis though since it contests plaintiff’s version of facts;

– “affirmative matter” is not the defendant’s version of events since this merely negates the essential factual allegations of the complaint;

– Section 2-619(a)(9) does not permit a defendant to submit affidavits or evidentiary material for the purpose of contesting plaintiff’s facts (“plaintiff is wrong”) and presenting defendant’s version of the facts (“I am right”);

– the 2-619 movant has the burden of producing evidence in support of the affirmative matter which defeats plaintiff’s claim;

– Section 2-619(a)(9) should not be used to contest plaintiff’s factual allegations (see above);

A summary judgment motion under 2-1005 is the proper motion to file if you want to dispute plaintiff’s version of facts (Ex: plaintiff alleges his last day of work was 12.31.12. Defendant disputes this. In a summary judgment motion, defendant could attach an affidavit or other document that asserts/shows that plaintiff’s last day was 11.30.12 (or some other date));

( ¶¶ 33-34, 37)

Section 2-1005 Motions (summary judgment motions)

– a section 2-1005 assumes that a cause of action has been stated but challenges the plaintiff’s facts;

– A section 2-1005 summary judgment motion goes beyond the pleadings to determined if the case presents an issue of fact;

– A summary judgment motion is similar to a 2-619(a)(9) motion: both motions use affidavits and other evidentiary materials; BUT

– a section 2-619(a)(9) motion is not a substitute for a summary judgment motion;

– a section 2-1005 summary motion should be used where (a) defendant uses material to support its version of the facts; (b) defendant points out factual deficiencies in plaintiff’s case; or (c) where defendant is asserting that plaintiff can’t prove his case;

– if defendant mislabels a summary judgment motion by calling it a 2-619 motion, the court may treat the motion as a section 2-1005 summary judgment motion.

¶¶ 51-54.

Application: Since the defendants alternately used deposition testimony (plaintiff was deposed before plaintiff filed his amended complaint) and a supporting affidavit to contest the veracity of plaintiff’s allegations, they didn’t offer proper affirmative matter on their Section 2-619 motions. (¶¶ 37-42)

Take-aways:

Jimmy John’s provides a thorough and nuanced discussion of the common pleadings motions utilized in Illinois and describes the key features and differences between them.

The Plaintiff sought to enforce 18-month long and (effectively) nation-wide restrictive covenants (“non-competes”) that prevented defendants from (a) ever disclosing plaintiff’s proprietary information and (b) from soliciting construction staffing business within 100 miles of a Tradesman field office and within 25 miles of any Tradesman customer location. 2013 WL 3949020 at *2.

The District Court granted summary judgment for the defendants on all claims because plaintiff failed to prove compensable damages and therefore could not show irreparable harm: a required permanent injunction element.

Grounds: (1) Plaintiff employer failed to show irreparable harm; and (2) Plaintiff’s restrictive covenants (the “non-competes”) were unreasonable – both in terms of content and geographic scope.

Reasoning: Plaintiff showed no harm, much less irreparable harm. Irreparable harm means damages that are ongoing and difficult to quantify. The Court held that since plaintiff failed to seek preliminary injunctive relief (as opposed to permanent injunctive relief), this undermined its irreparable harm claim (in other words, why didn’t the plaintiff move for preliminary injunctive relief if its damages were so dire?).

The Court noted that a permanent injunction would be too “costly” as it would require defendants to reverse several years worth of efforts in building up their competing staffing firm. Tradesman, at *7-8.

The Seventh Circuit also found the non-competes signed by the defendants unreasonable under Ohio law. A contractual choice-of-law clause provided that Ohio law would govern (The plaintiff was an Ohio corporation.)

Ohio considers a restrictive covenant’s time and space limitations, whether trade secrets or confidential information are/is involved, whether the employer seeks to stifle ordinary competition, and the detrimental impact on the employee’s livelihood. Id. at *9.

Applying the factors, the Tradesman Court found that the proprietary information which plaintiff sought to protect was unreasonable. The Court noted that the information plaintiff was suing on – worker’s compensation and manager compensation rates, marketing materials and Dun & Bradstreet reports – was either publicly available, generally known or was information that the plaintiff didn’t try to keep secret. *8-9.

A plaintiff generally has to show that it tried to keep information confidential (under “lock and key”) for that information to qualify as a trade secret.

The Court also found the non-competes’ geographic restrictions unreasonable. They were so expansive, they were basically nation-wide restraints. To comply with the non-competes as written, the defendants really couldn’t work anywhere in the U.S. *9-10.

Lessons:

1/ publicly available or generally known information will not qualify for proprietary or trade secret information protection;

2/ restrictive covenants that don’t involve true trade secrets or proprietary information and that have nation-wide reach (“you can’t work anywhere in the U.S.”, e.g.) will not be enforced; and

3/ the party that loses a trade secrets case may have to pay the winning party’s fees even if the party had good faith belief in its claim when it filed the lawsuit – but later learns that its claim lacks merit (and still presses forward with the case).